Productivity rises in second quarter

Jump in output, lower labor costs indicate recession is easing

Martin Crutsinger Associated Press

Published 1:00 am, Wednesday, August 12, 2009

WASHINGTON — Productivity surged in the spring by the largest amount in almost six years while labor costs plunged at the fastest pace in nine years. The results point to a recession losing steam, but they do not bode well for the unemployed or those forced to work shorter weeks who were hoping for more hours.

The Labor Department said Tuesday that productivity, the amount of output per hour of work, rose at an annual rate of 6.4 percent in the April-June quarter, while unit labor costs dropped 5.8 percent. Both results were greater than economists expected.

Productivity can help boost living standards because it means companies can pay their workers more, with those wage increases financed by rising output. However, in this recession, companies have been using their productivity gains from layoffs and other cost cuts not to hire again but to bolster their profits.

The result: Many companies have been reporting better-than-expected second-quarter earnings despite falling sales.

Businesses producing more with fewer employees means millions of unemployed Americans likely will continue to face a dismal job market. Some analysts also worry that companies' aggressive cost-cutting could make it hard to mount a sustainable recovery. That's because a lack of wage growth and a shortage of jobs will likely depress consumer spending, which accounts for about 70 percent of economic output.

Ideally, businesses would use the current productivity gains to stabilize their own financial situations and as the economy rebounds, resume hiring to meet the rising demand, analysts said.

"Hopefully, businesses will stop the layoffs and start hiring again so that consumers will have the ability to spend, but that is a tricky transition," said Mark Zandi, chief economist at Moody's Economy.com.

In a second report, the Commerce Department said wholesale inventories declined for a record 10th consecutive month, falling 1.7 percent in June. That was nearly double the 0.9 percent decrease economists had expected.

But in an encouraging sign, sales rose 0.4 percent for a second straight month. The first back-to-back increases in a year boosted hopes that businesses will begin to ramp up production to meet rising demand.

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On Wall Street, stocks fell after the mixed economic reports and on comments from analyst Richard Bove of Rochdale Securities who wrote in a research note that bank earnings won't improve in the second half of this year and that many companies will post losses. The Dow Jones industrial average lost about 65 points in afternoon trading and broader indices also fell.

The 6.4 percent jump in productivity followed a 0.3 percent increase in the first three months of the year that was revised downward from an earlier estimate of a 1.6 percent gain. The revision partially reflected the annual benchmark revisions of economic data connected to the gross domestic product.

Economists had expected productivity to surge in the second quarter as businesses continued to lay off workers and trim the number of hours being worked by their remaining employees amid the nation's worst recession since the end of World War II.

The second-quarter productivity increase reflected that the number of hours worked fell much faster than output dropped. Total hours worked dropped at an annual rate of 7.6 percent, while the output of non-farm businesses fell at a 1.7 percent rate.

The nation's total output of goods and services, as measured by the gross domestic product, fell at an annual rate of 1 percent in the second quarter. That was a much slower rate of decline than the previous two quarters when the economy shrank at the fastest pace in more than a half-century.

Many economists believe the recession is on the verge of ending. Should the economy start to grow in the second half of this year, some companies might boost employment — if demand for their products showed a sustained increase.

Still, the leaner work force should help keep productivity rising in coming quarters although the gains are not expected to be as large as the jump in the spring.

"Before the recession of 2001, productivity typically fell in recessions because companies waited too long to respond to the downturn," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note.

Among those reporting second-quarter profits due partly to layoffs and other cost cuts were Internet company Yahoo Inc., which saw earnings grow 8 percent, and automaker Ford Motor Co.

The 6.4 percent jump in productivity at an annual rate was the biggest quarterly gain since a 9.7 percent surge in the third quarter of 2003.

The 5.8 percent decline in unit labor costs followed a revised 2.7 percent dip in the first quarter and was the biggest quarterly drop since a 7.7 percent decline in the second quarter of 2000.